Study: Health tax credit could mean big savings for small firms

(Crain's) — Nearly 138,000 small businesses in Illinois are eligible for a new tax break of more than $800 per worker to offset the cost of health insurance, but questions persist about how many employers will take advantage of the benefit, a new national study says.

The federal tax credit, which went into effect for the 2011 tax year, is an important part of the Obama administration's overhaul of health care. The break is available for small companies with 25 or fewer workers.

In Illinois, nearly 70 percent of those small businesses are eligible for the credit, which would mean a total tax savings of about $635 million, according to the report. The average credit would be about $838 per worker.

The study was issued by two Washington, D.C. non-profits: Families USA, which specializes in consumer health care, and the Small Business Majority, which focuses on employers' health care costs.

More than 3.2 million small businesses nationwide are eligible for the tax credit, which would generate an estimated $15.4 billion in tax savings in 2011 alone, according to the report.

But the Obama administration has estimated that only 360,000 U.S. businesses will take advantage of the tax credit.

“While the potential reach of this new tax credit is great, educating the small business community about it remains a challenge,” the report says.

The firms eligible for small-business tax credit are not required to provide health insurance under the “employer mandate” of the 2010 health care law, which requires firms with at least 50 employees to cover their workers or pay a penalty.

For small businesses, the decision to offer health benefits or not comes down to the bottom line, said Nancy Daas, employee benefits practice leader for Chicago-based benefits consultancy CMC Advisors Group.

“Of those companies that don't offer health benefits today, is this tax credit enough of a financial incentive to make the benefits affordable?” Ms. Daas said. “Every business is different.”

Under the Patient Protection and Affordable Care Act, businesses with 25 or fewer full-time employees are eligible for the tax break if they pay average annual wages below $50,000 and cover at least half of worker health premiums. Firms that employ 10 or fewer workers are eligible for the credit if they pay them less than $25,000 a year on average and cover more than half of premiums.

The credit, which reduces the amount of taxes owed, covers up to 35 percent of the cost of insurance premiums. Companies can claim the credit for up to two years.

In Illinois, an estimated 54,000 businesses with 10 or fewer employees are eligible for tax credits that could save them $245 million, or $1,113 per worker, on the firms' 2011 taxes, the study says.

“It's money on the table that small businesses aren't picking up,” said Barbara Otto, CEO of Chicago-based nonprofit Health & Disability Advocates. “They don't think about what it could mean per-employee. If you're employing 25 people, that can add up.”

Of firms with fewer than 50 workers and that offer health benefits, 65 percent last year said they had not explored their eligibility for the tax credit, according to a national survey by Menlo Park, Calif.-based Henry J. Kaiser Family Foundation. Of similarly sized firms that don't offer health insurance, 48 percent said they were not aware of the tax credit, the survey said.

The tax break will expand to cover 50 percent of health premium costs in 2014, provided this aspect of President Obama's health reform package remains intact after the U.S. Supreme Court rules on the law's constitutionality.